Our View: The ‘rescue package’ designed to destroy the economy
Cyprus Mail, March 17, 2013
http://www.cyprus-mail.com/opinions/our-view-rescue-package-designed-destroy-economy/20130317
EVEN though the haircut of bank deposits had been on the agenda of the EU for
more than a month now, featuring in Commission memos and being openly discussed
by European politicians, most of whom, refused to rule it out, few people
thought the Eurogroup would go ahead with it. It was an idle threat, to force
Cyprus privatise SGOs and increase the corporate tax, was the prevailing view.
And after all, President Anastasiades had emphatically declared in his
inauguration speech that “absolutely no reference to a haircut on public debt or
deposits will be tolerated,” adding that “such an issue isn’t even up for
discussion.” Finance Minister Michalis Sarris made similarly reassuring
statements, arguing that it would be lunacy for the EU to impose such a measure
because it would threaten the euro system.
Germany and the leaders of the Eurogroup opted for this lunacy, calculating that
Cyprus is too small and inconsequential for the haircut on its bank deposits to
cause contagion in the eurozone. Of course, the markets could view the decision
differently, perhaps not when they open on Monday, but a few weeks later as it
becomes apparent that not even deposits in European banks are safe from raids by
the Eurogroup.
It is obvious from the statements made that Anastasiades was blackmailed into
accepting this euphemistically called ‘solidarity levy’. If he did not accept
it, the European Central Bank would not provide Emergency Liquidity Assistance
to the Cypriot banks, after the March 21 deadline (it had been extended by two
months in January) and the banks would have collapsed on the same day, with
people losing much bigger parts of their deposits than the seven to 10 per cent
that would be taken now.
Was there an alternative for Anastasiades? It is difficult to say, given the
pressure for a political agreement by last Friday. All indications are that our
EU partners had taken their decision before then and this was why they scheduled
the Eurogroup meeting that would discuss the bailout on a Friday night. The
Cypriot banks would be closed for three days during which all the steps for
bailing in deposits could be taken, and the banks could re-open normally on
Tuesday.
If only things were so simple. It is highly unlikely it will be business as
usual at the banks on Tuesday as thousands of people will likely turn up to
withdraw their money. Big depositors would give instructions for the transfer of
money abroad and never again place it in a Cypriot bank. What would be the
capital needs of the banks faced with a mass exodus of deposits, brought on by
the Eurogroup decision? Would the EU order another ‘solidarity levy’ in such a
case or would it declare Cyprus bankrupt, having dealt a fatal blow to its
financial services sector that is by far the biggest contributor to GDP, and
kick it out of the eurozone?
Yesterday’s decision still needs to be approved by the House of Representatives,
which will meet today or tomorrow to approve the haircut bill. Judging by the
statements made by the political parties yesterday the approval of the relevant
bills is far from certain. Anastasiades was to meet the party leaders last night
in an effort to persuade them to support the bills, but there are already many
dissenting voices, not to mention the public outcry, which is bound to affect
the stand of the parties.
One deputy yesterday wondered whether it would be better to allow the two banks
that required liquidity assistance from the ECB to go under instead of accepting
the haircut. But the problem would not be confined to these two banks as there
is inter-dependence among the banks and a bank run on two would spread to all.
This will be Anastasiades’ main argument in explaining why he agreed to the bail
in of deposits. The alternative would have been the collapse of the banks, state
bankruptcy and exit from the euro.
Under the circumstances the president opted for the lesser of two evils, even
though we doubt there would be many people who would give him credit for that.
In effect, the EU offered a ‘rescue package’ that is designed to destroy rather
than rescue what is left of the Cyprus economy.
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